Not every amount included in a construction draw request should automatically be recommended for funding.
During a draw review, there may be portions of the request that are not fully supported by observed construction progress, available documentation, or the remaining project budget. In those cases, a holdback recommendation can help the lender identify the amount that may warrant further review before funds are released.
For construction lenders, the key question is not simply whether work has been billed. It is whether the amount requested is reasonably supported by what has actually occurred on the project.
Below are some of the most common situations in which a construction draw may warrant a holdback recommendation.
1. The Billing Is Ahead of the Work in Place
One of the most common reasons for a holdback is a mismatch between the percentage billed and the percentage of work observed onsite.
For example, a contractor may bill a line item at 80% complete while the site inspection supports closer to 60% completion.
Funding the full amount could put the project financially ahead of its physical progress. A holdback on the unsupported portion can help keep loan disbursements aligned with work actually completed.
This is one of the key issues discussed in NWM’s 5 Red Flags in a Construction Draw Request.
2. Work Is Incomplete
A line item may also warrant a holdback when the work has started but has not reached the level represented in the draw request.
For instance, flooring may have been delivered and partially installed, but the payment application may show the flooring scope as fully complete.
In this situation, the unfinished portion may remain unfunded until a subsequent inspection confirms additional progress.
Construction draw inspections provide lenders with an independent view of what is actually in place at the time of the draw. Learn more in NWM’s guide to construction draw inspections.
3. Stored Materials or Deposits Are Not Adequately Supported
Construction draws often include requests for materials that are not yet installed onsite.
This is especially common with long-lead equipment, custom finishes, windows, mechanical systems, cabinetry, and other items that may require deposits or offsite storage.
These requests may warrant a holdback when documentation does not clearly confirm:
- The materials have been purchased
- Payment has been made or is currently due
- The materials are designated for the specific project
- Ownership can be established
- The materials are appropriately insured
- The storage location can be verified
- Delivery to the project can be reasonably confirmed
The concern is not that offsite materials should never be funded. Rather, the lender should have sufficient documentation to support the advance.
NWM discusses this topic further in Offsite Materials and Deposits: What Lenders Should Know Before Approving a Draw.
4. General Conditions or Contractor Profit Are Being Paid Too Far Ahead
Some construction costs cannot be verified simply by looking at installed work.
General conditions may include project supervision, temporary facilities, site utilities, safety measures, project management, and other expenses that occur throughout construction.
When general conditions or contractor profit are heavily front-loaded, the contractor may receive a disproportionate share of those funds early in the project while substantial work remains.
A holdback can help maintain a more reasonable relationship between these costs and overall project progress.
Read more in Why General Conditions and Contractor Profit Shouldn’t Be Paid Upfront.
5. Change Orders Are Unsupported or Unapproved
Change orders are common, but they can introduce additional risk into the draw process.
A draw may include costs related to a change order before the lender has received sufficient documentation showing:
- What changed
- Why the change was necessary
- The cost of the change
- Whether required approvals have been obtained
- How the change affects contingency
- Where the additional funds will come from
Until the change is adequately supported, the associated amount may warrant a holdback.
Repeated or significant change orders can also be an early indication that the original construction budget needs closer review.
6. The Project Appears Financially Ahead of Physical Progress
Another important warning sign is when the percentage of funds disbursed materially exceeds the percentage of construction completed.
For example, if 75% of the construction budget has already been funded while the project appears only 60% complete, the lender should understand the reason for that difference.
There may be a legitimate explanation, such as major equipment deposits or materials purchased in advance. But if the gap cannot be supported, it may indicate that funds are being drawn faster than work is progressing.
The larger concern is whether sufficient funds will remain to complete the project.
Federal banking guidance emphasizes the importance of monitoring construction disbursements and confirming that sufficient funds remain available for completion. [1]
When this imbalance becomes significant, a routine draw review may no longer be enough. NWM discusses some of these warning signs in The First Signs You Need a Construction Budget Review Before It Is Too Late.
7. Previously Identified Issues Remain Unresolved
A holdback may also carry forward from one draw to the next.
For example, a previous report may have identified incomplete work, unsupported stored materials, missing documentation, or a discrepancy in a particular budget line.
If the issue has not been resolved by the next draw, the holdback may remain in place until sufficient documentation or additional progress is provided.
This is why construction monitoring should be cumulative rather than treating each draw as an isolated event.
Prior draws, remaining balances, change orders, outstanding issues, and current progress should all be considered when evaluating the next funding request.
A Holdback Recommendation Is Not a Funding Decision
A construction consultant’s role is to provide the lender with an independent assessment of the draw request.
The lender ultimately determines whether the requested funds are released.
A holdback recommendation simply identifies an amount that may not yet be fully supported based on the information available during the draw review.
The lender can then consider the recommendation alongside the loan documents, borrower explanations, internal lending policies, additional documentation, and other relevant information.
When Can a Holdback Be Released?
In many cases, holdbacks are temporary.
Depending on the reason for the holdback, the amount may become eligible for funding once:
- Additional work is completed
- Missing invoices or documentation are provided
- Stored materials arrive onsite
- Ownership or insurance is confirmed
- A change order receives approval
- An incomplete scope is finished
- A subsequent inspection verifies the additional progress
The exact requirements will depend on the lender’s construction loan documents and disbursement procedures.
Why Holdbacks Matter
The goal of a construction draw review is not simply to verify that money has been spent.
It is to help determine whether construction progress, funding, and the remaining budget continue to make sense together.
A well-supported holdback recommendation can help prevent a project from becoming overfunded before the work has caught up.
Throughout the construction process, lenders should continue comparing:
- Work completed
- Funds previously disbursed
- Current draw requests
- Remaining contract balances
- Change orders
- Contingency
- Stored materials
- Remaining construction scope
NWM discusses this relationship further in Draw Schedules 101: How a Flawed Draw Schedule Increases Lending Risk.
Final Thoughts
A holdback recommendation does not necessarily indicate that a construction project is in distress.
Often, it simply identifies a portion of the current draw that needs additional support before funding.
For lenders, the important question is whether the amount requested is consistent with the work completed, the documentation available, and the funds still required to finish the project.
Identifying discrepancies early can help lenders address issues while there is still time to obtain clarification, adjust funding, or investigate potential budget concerns.
NWM Risk Management provides independent construction draw inspections, construction monitoring, plan and cost reviews, budget reviews, and cost-to-complete analyses for lenders nationwide.
Sources
[1] Office of the Comptroller of the Currency. Commercial Real Estate Lending, Comptroller’s Handbook.
[2] National Credit Union Administration. Construction and Development Loans.
